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The Shanghai Cooperation Organizations Growing Trade Influence

Op-Ed Commentary: Chris Devonshire-Ellis

Nov. 10 – An entity little understood by many, yet growing in regional clout is the Shanghai Cooperation Organization. Originally formed in 1996 by China, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan, it was expanded in 2001 to include Uzbekistan, and subsequently took on its current name. Created as a regional security council to deal with the threats posed by militant Islam in the neighboring CIS states following the breakup of the Soviet Union, the SCO also counts as permanent observers the nations of India, Iran, Mongolia and Pakistan, and has dialogue partners with ASEAN, CIS, the Organization of Islamic Conference, the United Nations, Afghanistan and Turkmenistan.

The Shanghai Cooperation Origination was formed on June 15, 2001 after Uzbekistan was admitted into the Shanghai Five group, which had been created in 1996 by Kazakhstan, China, Kyrgyzstan, Russia and Tajikistan. The SCO was originally formed due to growing security concerns following the collapse of the Soviet Union, terrorist and security elements were not being sufficiently well coordinated. However, since then, the SCO has expanded its remit to take in matters related to security, but also hinging on trade and development, thus pressing home a theory that inter-regional violence may cease if trade avenues are opened up, making people’s lives more worthwhile through the development of wealth rather than focusing on hard to unravel age-old rivalries.

At its fifth summit in the capital of Kazakhstan, Astana, in June 2005, when representatives of India, Iran, Mongolia and Pakistan attended for the first time, Nursultan Nazarbayev, the President of Kazakhstan, greeted the guests in words that had never before been used in any context: “The leaders of the states sitting at this negotiation table are representatives of half of humanity.” Its six full members account for 60 percent of the land mass of Eurasia and its population is a quarter of the world’s total. With observer states included, its affiliates account for half of the human race.

Its strategic importance then, from that time, has been growing, as is also demonstrated by the makeup of its executive body, the Council of Heads of State, the top decision-making body in the SCO. This council meets at the SCO summits, which are held each year in one of the member states’ capital cities. The current Council of Heads of State consists of Roza Otunbaeva (Kyrgyzstan), Hu Jintao (People’s Republic of China), Islom Karimov (Uzbekistan), Nursultan Nazarbayev (Kazakhstan), Dmitry Medvedev (Russia), and Emomalii Rahmon (Tajikistan).

The Council of Heads of Government is the second-highest council in the organization. This council also holds annual summits, at which time members discuss issues of multilateral cooperation. The council also approves the organization’s budget. The council of Foreign Ministers also holds regular meetings where they discuss the current international situation and the SCO’s interaction with other international organizations.

All SCO members but China are also members of the Eurasian Economic Community, which includes Belarus, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Uzbekistan, and has Armenia, Moldova and Ukraine as observers.

A Framework Agreement to enhance economic cooperation between SCO members was signed in 2003. At the same meeting Chinese Premier Wen Jiabao proposed a long-term objective to establish a free trade area in the SCO, while other more immediate measures would be taken to improve the flow of goods in the region. A follow up plan with 100 specific actions was signed in 2004 and the evolution from security to trade was further enhanced in 2005 when the SCO agreed to prioritize joint energy projects; including the oil and gas sectors, the exploration of new hydrocarbon reserves, and joint use of water resources. The organization also agreed in 2005 to an Inter-bank SCO Consortium in order to fund future joint projects.

Last year, China announced plans to provide a US$10 billion loan to SCO member states to shore up the struggling economies of its members amid the global financial crisis. That summit was held together with the first BRIC summit, and produced the China-Russia joint statement that said that they wanted a bigger quota in the IMF – something which has just recently happened.

At the 2007 SCO summit in Shanghai, Iranian Vice President Parviz Davudi addressed an initiative that has been garnering greater interest and assuming a heightened sense of urgency when he said, “The Shanghai Cooperation Organization is a good venue for designing a new banking system which is independent from international banking systems.”

Russia agreed, and an address by then Russian President Vladimir Putin included the following comments: “We now clearly see the defectiveness of the monopoly in world finance and the policy of economic selfishness. To solve the current problem Russia will to take part in changing the global financial structure so that it will be able to guarantee stability and prosperity in the world and to ensure progress. The world is seeing the emergence of a qualitatively different geo-political situation, with the emergence of new centers of economic growth and political influence. We will witness and take part in the transformation of the global and regional security and development architectures adapted to new realities of the 21st century, when stability and prosperity are becoming inseparable notions.”

India, which currently has only observer status, is poised to join the SCO as a full member. Russia has encouraged India to join as they see the country as a crucial future strategic partner. Additional factors working in favor of India joining the SCO are its major military presence in Central Asia, its close military ties with several Central Asian countries (especially Tajikistan and Russia) and also its deep interest in the region’s energy resources. In 2010 India showed a keen interest in joining the group, “We are interested in SCO membership. It is a very important organization concerning the region,” sources within the Indian government said.

Iran currently has observer status in the organization, and applied for full membership on March 24, 2008. However, because of ongoing sanctions levied by the United Nations, it is blocked from admission as a new member. The SCO stated that any country under U.N. sanctions cannot be admitted, however the implications of Iran joining the organization have garnered both media and academic attention.

The SCO Secretariat is based permanently in Beijing, but nonetheless, the implications of the development of the body as a serious regional player are starting to have profound impact on the development of trade within Central Asia, and have already initiated over 20 large-scale projects related to transportation, energy and telecommunications and held regular meetings of security, military, defense, foreign affairs, economic, cultural, banking and other officials from its member states. No multinational organization with such far-ranging and comprehensive mutual interests and activities has ever existed on this scale before.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates, establishing the firm’s China practice in 1992. The firm now has ten offices in China, five in India, and two in Vietnam. For advice over China strategy, trade, investment, legal and tax matters please contact the firm at [email protected]. The firm’s brochure may be downloaded here.

Chris also contributes to the Asia Briefing publications China Briefing, India Briefing and Vietnam Briefing.

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Dezan Shira & Associates provide a range of services for companies looking to undertake foreign direct investment into Asia, These include corporate establishment, accounting, tax, payroll, audit and due diligence. To learn more about the firm, please contact one of our specialists at [email protected], download our corporate brochure or visit at us www.dezshira.com

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